The information of stocks that lost in prices are displayed on an electronic board inside the n Securities Exchange, operated by ASX Ltd., in Sydney, , on Friday, July 24, 2015. The n dollar slumped last week as a gauge of Chinese manufacturing unexpectedly contracted, aggravating the impact of declines in copper and iron ore prices. Photographer: Brendon Thorne/Bloomberg MARKETS. 7 JUNE 2011. AFR PIC BY PETER BRAIG. STOCK EXCHANGE, SYDNEY, STOCKS. GENERIC PIC. ASX. STOCKMARKET. MARKET.
Stock information is displayed on an electronic board inside the n Securities Exchange, operated by ASX Ltd., in Sydney, , on Friday, July 24, 2015. The n dollar slumped last week as a gauge of Chinese manufacturing unexpectedly contracted, aggravating the impact of declines in copper and iron ore prices. Photographer: Brendon Thorne/Bloomberg
Risk trends across the global financial spectrum stabilised this past session, but it didn’t pace much in the way of significant recovery. That is somewhat surprising considering the US government seems to have bought reprieve from the next debt crisis bearing down on the country. Yet, despite the encouraging news, US equity indexes showed little progress beyond the initial gap higher won through the Wednesday open. Meanwhile, the onus of North Korea tension and a mixed backdrop of global monetary policy – normalisation that exposes increased risk taking versus a scramble back to the extreme end of the curve to suggest a troubled future – are still rolling around in investors’ minds.
1. Wall Street: Most of the action for US equities was seen on the open – meaning it was more a reflection of the bounce in sentiment registered in European hours rather than significant course correction into the New York hours. Through the end of the session, the S&P 500 closed up 0.4 per cent (2,467), the Dow 0.25 per cent (21,808) and Nasdaq 0.3 per cent (6,393). That was performance generally in line with the outcome for Euro Stoxx 50 Index. For volume, the day’s turnover was still elevated from the previous three week’s average; supporting the seasonal shift that is often attached to the the August to September transition. Furthermore, the VIX remains at 11.7. A higher resting rate for implied volatility likely speaks more to market activity and opportunity for traders than fear and risk to investors. This popular volatility measure is still well below the past three-year average of 15.
2. US debt ceiling relief but North Korea risks linger: The most surprising news through this past US session was President Donald Trump’s unexpected support of the Democratic Party’s proposal to fund the government and increase the country’s debt limit by three months. That effectively disarms the impending threat of a third debt ceiling standoff in the US in six years. Back in 2011 and 2013, the brinkmanship drew the country right to the edge of a financial cliff that threatened to through global markets into a crisis as the world’s preferred ‘risk free’ assets (Treasuries) were cast deep in shadow. The first standoff earned the US a cut to its sovereign credit rating from Standard & Poor’s which maintains a serious blemish to the country’s pristine safe haven status. It was remarkable that there was not more of a rebound in risk assets following this news. Perhaps there are concerns that GOP republicans would not support the initiative or maybe the concern truly rests with the unresolved North Korea escalations. Yet, it is just as likely that we are seeing that complacency – which has been the primary feature of the financial landscape – can curb risk taking as readily as fear at this stage.
3. n dollar: While the Aussie Dollar registered some significant movement against the New Zealand Dollar (gains) and Canadian Dollar (losses), this progress was almost exclusively the reflection of more motivated counterparts. From the most liquid pairings – AUD/USD, EUR/AUD and GBP/AUD – there was virtually no change on the day. The robust 0.8 percent 2Q GDP reading from yesterday’s session that was also slightly cooler than economists’ consensus seemed to hold little lasting influence.
4. ASX: The ASX200 is due a strong open Thursday with the general stability from the previous US shares session carrying over. Wednesday, the best performing sectors were energy and industrial with the worst showing from financials. Looking at the S&P 500’s breakdown, energy offered a significant acceleration of performance with a 1.6 percent climb while financials were green to the tune of 0.2 percent.
5. Surprise bank of Canada hike: The Bank of Canada surprised the market’s Wednesday when Governor Poloz and crew announced another 25 basis point hike to the benchmark rate that brings the Loonie’s yield to a competitive 1.00 percent. This was not completely unexpected as the group moved at its meeting in July and the market afforded a 44 percent probability of a subsequent move according to overnight swaps. That said, the audacious pace compared to a far more constrained Fed and other global peers who are not comfortable with even discussing normalisation makes the Canadian Dollar look even more stately as a carry currency. The response was remarkable with USD/CAD dropping over 2 percent immediately following the news. The currency posted gains against all of its major counterparts, but some of the drive eased back through the remainder of the session. At this point, the Loonie is the only traditional, liquid carry currency that is raising rates and it is now moving at a faster pace than the Fed. The premium this affords the currency is significant, but how much reach this affords depends on how aggressively the market is reaching for yield.
6. ECB moves to deflate expectations: With the Bank of Canada and Reserve Bank of policy decisions setting the extremes for how market moving such events can be (the former extremely, the latter not at all), the European Central Bank seems to be interested in following the RBA’s lead. The Eurozone policy authority once again used its unofficial channels to guide market expectations. Last week, unnamed officials ‘familiar’ with the situation suggested more voting members were concerned with the climb from the Euro. This past session, a similiarly described source let leak to Bloomberg that a plan to reduce its balance sheet would not be reached before October. It is highly unlikely that these are rogue leaks from staff. Rather, this is almost certainly an effort of forward guidance to help shape market reactions without having to put the bank’s credibility on the line if it fails in the endeavor. Watch for the ECB decision later today as this is arguably the developed world’s most dovish effort.
7. Commodities: Softs saw robust performance through this past session with particularly strong showing in sugar and corn. Closer to home wheat and live cattle prices however were more restrained in performance. It is the energy complex that holds he most promise for Thursday’s session. Crude oil prices climbed another 1 percent which has shown some spill over to natural gas and coal. For metals, ore, gold and aluminium had descending performance from 0.6 per cent gain down to a 1.1 per cent loss.
8. Market Watch:
SPI futures up 17 points or 0.3% to 5691
AUD +0.05 per cent to 0.8000 US cents
On Wall St, Dow +0.41 per cent, S&P 500 +0.42 per cent, Nasdaq +0.39 per cent
In New York, BHP +1.11 per cent, Rio +0.68 per cent
In Europe, Stoxx 50 +0.38 per cent, FTSE -0.25 per cent, CAC +0.29 per cent, DAX +0.75 per cent
Spot gold -0.51 per cent at US$1332.81 an ounce
Brent crude +1.31 per cent to US$54.07 a barrel
Iron ore +0.59 per cent to US$86.847 a tonne
Dalian iron ore at 554.0 yuan
LME aluminium (cash) -1.19 per cent to $US2072.25 a tonne
LME copper (cash) -0.25 per cent to US$6869.50 a tonne
10-year bond yield: US 2.11 per cent, Germany 0.35 per cent, 2.60 per cent
This column was produced in commercial partnership between Fairfax Media and IG